New Rules Tighten Mortgage Lending

by Gwen Moritz  on Monday, Jan. 27, 2014 12:00 am  

Chuck Quick

While lobbyists for smaller banks are still hoping for reprieve, some mortgage bankers in Arkansas seem resigned to — and even slightly relieved by — new regulations put in place by the federal Consumer Finance Protection Bureau.

The CFPB, the controversial bureaucracy created by the Dodd-Frank Act of 2010, finalized the mortgage lending regulations in May 2013 and the major requirements took effect Jan. 10.

Although they required expensive retooling of lending systems, mortgage loan executives say the regulations actually return the industry to the kind of underwriting standards that were typical before mortgage-backed securities became popular investment vehicles in the 2000s — and which quickly regained popularity after the housing crash.

“What we’re doing these days is not very different than what we were doing 10 years ago,” Chuck Quick, president and CEO of IberiaBank Mortgage in Little Rock, said.

“It really isn’t anything different than we have been doing for some time,” said Scott McElmurry, president and CEO of Bank of Little Rock Mortgage.

“There’s no doubt there is more documentation required,” McElmurry said. “More of the documentation now is combating fraud than it is to determine ability to repay.”

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Ability to repay, an old-fashioned concept just a few years back, is now so deeply engrained that mortgage bankers have shortened it to an acronym, ATR. And ATR has become as much a part of the calculus as APR, annual percentage rate, in creating the holy grail of products: QM, a qualified mortgage.

“A Qualified Mortgage is a loan a borrower should be able to repay,” according to a fact sheet issued last month by the CFPB. More specifically, that means:

  • The mortgage can’t be too big. A borrower’s total debt-to-income ratio can’t be more than 43 percent.
  • The origination fees can’t be too expensive. Points and fees can’t exceed 3 percent on a mortgage of more than $100,000.
  • The interest rate can’t be too high. The rate on a qualified first mortgage can’t be more than 1.5 percentage points higher than the average prime rate.

And there’s more: Creative financing, what the CFPB calls “risky features,” such as negative amortization, interest-only mortgages and amortizations longer than 30 years, cannot be part of a QM.

Even short-term amortizations with balloon payments at the end, the kind that have been popular with self-employed borrowers, will have a hard time getting the QM seal of approval because of that ability-to-repay requirement, McElmurry said.

“Under the strictest interpretation, I may have made sure [the borrower] can make the monthly payment, but I have not made sure they can make the balloon payment,” he said.



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